Articles Tagged With: Debt-to-Income Ratio

April 12, 2016

FHA Loans And Your Debt-To-Income Ratio: What You Should Know

A borrower’s debt-to-income ratio or DTI is an important calculation the lender must make when processing an FHA home loan application. Your monthly debts, compared to your lender-verified income, will help determine your acceptability as a credit risk and your ability to pay your mortgage. But how does the lender process your debt information to arrive at the ratio? HUD 4000.1 establishes guidelines for the lender to follow in order to establish the borrower’s DTI. On pages 249 and 250 we find the following: “The Mortgagee must determine the Borrowers monthly liabilities by reviewing all debts listed on the credit report, URLA, and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.” Some types of debt may be omitted by the lender in certain cases. For | more...

What happens to my FHA loan in a natural disaster?

August 14, 2015

FHA Loan Income Rules: Does Alimony/Child Support Count As Income?

By Joe Wallace

For any applicant trying to get an FHA loan to purchase a home, the debt-to-income ratio is very important. How much money you have coming in versus how much you have going out for monthly bills and other financial obligations is a very big part of the lender’s calculations to see whether a borrower can afford the new loan. One area that concerns some is whether alimony/child support is able to be used as part of the borrower’s potential income for those calculations. FHA loan rules currently available in HUD 4155.1 have plenty to say on how and why such income might be used. This type of income can indeed by used, as long as it meets FHA minimum requirements for “effective income” or “verifiable income”: “Alimony, child support, or | more...

August 12, 2015

FHA Loans, Debt-To-Income Ratios, and Cosigning

By Joe Wallace

We received an excellent reader question recently about how being a co-signer on someone else’s financial obligation might affect a borrower’s chances for an FHA mortgage loan. Does being a co-signer have any influence on how the lender views your credit? Your debt-to-income ratio? FHA loan rules published in HUD 4155.1 address these issues. Chapter Four Section C has a heading titled “Contingent Liability On Cosigned Obligations” and addresses this reader question directly. The rules begin by describing what is considered a contingent liability for the purposes of processing an FHA mortgage loan appication: “A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment.” Simple enough. But the FHA goes further in the next | more...

When Is An FHA Loan Better Than A Conventional Loan?

July 3, 2015

FHA Loans And Borrower Debt

By Joe Wallace

Borrowers new to the FHA loan process have lots of questions. One we received recently involves debt-to-income ratios. A reader wanted to know if his credit report, having been newly cleared of a judgment, needed to also be free of other minor debt. The simple answer is that, no, the FHA loan program does not require a borrower to be completely free from debt in order to apply for a new home loan or refinance loan. But a borrower’s debt to income ratio will be examined to make sure the borrower can afford the loan. That ratio is very important and is one of the reasons why financial planners and home loan experts recommend examining your finances carefully at least a year before committing to a new home loan. Reducing | more...

May 9, 2015

FHA Loans, Your Credit Report and the Debt-To-Income Ratio

By Joe Wallace

A reader asks, “My question is about what debt matters and witch debt doesnt.I have 4 debts that have been removed from my credit report according to credit karma and 1 credit card that is closed but I owe 1100 dollars on.” Any current debt (outside of student loans under qualifying deferment plans and qualifying medical debt which may be viewed by the lender in a different way depending on circumstances) may affect a borrower’s debt to income ratio calculation for an FHA loan. Anything that has dropped off your credit report won’t be an issue–if it isn’t on your credit record chances are it’s not a factor in the loan approval process unless there’s some record of missed or late payments associated with the accounts that does exist. When | more...

March 11, 2015

FHA Loans and Debt-To-Income Ratio: A Reader Question

By Joe Wallace

A reader asks, “Our daughter and son in law are trying to obtain a FHA loan. They are only using my son in law for the loan because our daughter’s credit score is too low. However his income/debt ratio is too high because of a car loan.” “We have agreed to pay off the car to lower the monthly income/debt ratio. Their combined income is enough to cover the mortgage and pay us back. How will this affect their loan application?” Unfortunately, there’s no clear way to address this question for a variety of reasons. There are many variables including whether or not the couple resides in a community property state, where state law will have a say in how the lender may or may not consider the FHA loan | more...

February 27, 2015

FHA Loan Debt To Income Ratios

By Joe Wallace

A reader asks, “Hi. My wife and I are planning to buy a house. My wife has a stable job for six years as registered nurse and I is currently a homemaker. Both of us has credit score of 720+ and we never missed a single payment in our credit cards and personal loans. What is our chance to be approved if our debt to income ratio is 49%? Can we qualify for a “no-conforming loan”? (Loan amount is $225,000, please note that mortgage interest, principal, taxes, insurance, HOA fee are already included in the DTI.” According to the FHA official site, many FHA loans are underwritten via an automated system. Here’s a quote from an FHA mortgagee letter from 2013 which announced changes to when and how a lender | more...

May 19, 2014

FHA Loan Reader Questions: Student Loans and the Debt-To-Income Ratio

By Joe Wallace

A reader asks, “I am trying to purchase a property through the first time home buyer’s program. I have student loans that are in deferment for two years because that is the time I will be graduating and my school provided a letter confirming this to the loan officer.” “The loans has been deferred before i submitted my loan documents so therefore, one deferment will be end in October, 2014 and the other December, 2014 but they will be placed in deferment again for another year until I end school. The closing of this property is June, 2014. Will this pose a problem or can the sworn letter from the school be used.” The reason this question is important in the FHA home loan process is because when your loan | more...

December 6, 2011

FHA Loans and the Debt To Income Ratio: Projected Debt

By Joe Wallace

In a previous blog post, we mentioned the importance of the debt to income ratio as part of the FHA loan application process. Calculating the debt to income ratio for the purpose of underwriting an FHA mortgage loan includes adding up the entire monthly mortgage obligation (principal and interest, escrow for taxes, hazard insurance, mortgage insurance premium, and any homeowners’ association dues) and reviewing all revolving and installment debt due per month. These can include personal and automobile loans, student loans, credit card debt and more. These amounts are combined and divided by the borrower’s verified gross monthly income. FHA rules say the maximum ratio to qualify is 41%. But when calculating that debt to income percentage, the FHA requires lenders to examine not only current financial obligations but also | more...

December 5, 2011

FHA Loans and the Debt To Income Ratio

By Joe Wallace

The debt to income calculation is a very important part of a borrower’s FHA loan application review. The lender must analyze the amount of verified income and compare it to the amount of debt the borrower has to see whether the borrower can afford his or her current monthly obligations and the projected monthly FHA mortgage loan payment. To do this, the lender takes income (only income which can be verified as stable and reliable) and compares it to all current debt and calculates what percentage the debt takes of the verified income. How is this done? The lender adds up the total mortgage payment, which includes principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, and any other payments that are considered part of | more...